Facebook to Phase Out Credits, Replace It with Real Money

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As the ongoing mess in the Eurozone reminds us on a daily basis, currencies come and go. Just last week, we thought the Drachma might make a less-than-triumphant return, depending on what the Greeks said at the ballot box. If the Drachma returned, so too might the Lira, the Peseta, the Irish Pound and wampum, for all we know. But not all currencies come and go with so much fanfare. Some, like Facebook Credits, which never was really a currency anyway, go away with nothing more than a blog post — this happened on Tuesday at 1:30pm.

Facebook explains that, because so many apps created in-app currencies of their own, there is less need for Credits. “By supporting pricing in local currency, we hope to simplify the purchase experience, give you more flexibility, and make it easier to reach a global audience of Facebook users who want a way to pay for your apps and games in their local currency,” reads the FAQ.

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By the end of the year, Credits will be totally phased out. However, Facebook will still keep the 30 percent cut from all transactions, just like it did with Credits. Transactions will be pegged to exchange rates the day they were made, and developers can price their currencies differently in different markets; a game popular among Japanese players, for instance, might make its fake currency more expensive in Yen than in Dollars.

Facebook hopes to increase app-makers’ revenue — and in turn, its own revenue — by making the user experience more seamless. Facebook remains the middleman, taking its 30 percent cut out of all transactions, but it has recognized that its currency has become a superfluous and annoying layer between consumers and virtual goods. Indeed, the problem is that Credits ceased to be a medium of exchange — a defining feature of a currency. Credits became useful only as a way of converting Dollars (or Yen or Pounds) into other virtual currencies, which are, in turn, exchanged for virtual goods. Credits were a currency in the same way that arcade tokens are currency for buying plastic trinkets — you must first buy the tokens with real money in order to play games to earn tickets to get plastic trinkets, but they’re entirely useless outside of the ecosystem of the arcade. They can be exchanged for nothing, but provide the owner of the arcade a way of getting their proper cut.

However, Credits’ failure stems from the fact that Zynga and other games can be played outside the Facebook arcade. And so, these platforms have developed their own “currencies” so that users may spend ungodly sums of real money on nonexistent things without Facebook getting in the middle.

Facebook, which you may have heard just went public, is very dependent on income derived from these in-app currencies. About 15 percent of its revenue in 2011 came from Credit payments, and just 3 percent of that 15 was from app-makers other than Zynga. For its part, Zynga is entirely dependent on a tiny minority of users to keep its business afloat: 1 percent of Zynga users account for as much as half of its revenue.

By eliminating Credits, Facebook is giving up on its attempt to create an arcade over which it has complete control, but it is also likely trying to broaden the base of users willing to spend money on things that do not exist — virtual cows, stuff like that. They’ve encouraged developers to create subscription model games. An image embedded into Facebook’s blog post shows KIXEYE’s Backyard Monsters game, which has a subscription that offers “inferno monsters and increased capacity in Hatcher Control Center queue” for the competitive price of just 1,000 Shiny a month — or, for cretins unfamiliar with the Dollar-to-Shiny exchange rate, $9.95 a month.

Many bloggers thought Facebook Credits might become an actual currency, one that consumers might use to buy real goods through Facebook. Even smart economics bloggers like Slate’s Matthew Yglesias drank the kool-aid, though he noted that the 30 percent cut made this impossible.

Credits is, and always was, just a method to get people to buy virtual goods through Facebook. Perhaps Facebook feels less pressure to dazzle the SEC and investment bankers now that it has finally gone public, and so it is only now being honest about Credits: it was never a currency.

Be careful when you read predictions from tech blogs. These people have a way of going overboard.

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